Bachem Annual Report 2003

We are Bachem. Peptides are our business.

Content1 Bachem - who we are2 Preface4 Quality at Bachem – identifying and meeting customer needs6 Marketing – customer orientation as the basis for success8 Business Review:8 New Chemical Entities10 Generics12 Research Ingredients14 Human Resources 14 Safety and Environment16 Corporate Governance 22 Financial Report42 Financial Statements of Bachem Holding AG47 Shareholder Information48 Contacts

2003 2002 2001 2000 1999

Net cash flow from operating activities (in CHF m) 35.5 37.6 31.4 31.7 44.9

EBITDA1 (in CHF m) 60.9 61.6 62.4 55.2 57.3

EBITDA1 in % of sales 42.1% 41.1% 44.2% 49.5% 58.2%

EBIT2 in % of sales 33.5% 32.2% 34.7% 41.0% 50.7%

Return on equity (ROE) 11.5% 10.8% 12.4% 17.2% 16.8%

Number of employees (in full-time equivalents) 495 479 468 376 392

Sales per employee (in CHF) 292 196 312 919 302 032 296 335 302 277

1 Operating income before depreciation and amortization2 Operating income

Sales (in CHF m) EBIT2 (in CHF m) Net income (in CHF m)

2003 - Key figures

2003 in brief• Net income increased by 11.4%, with sales growth of 1.8% in local markets

• EBIT margin increased by 1.3 percentage points to 33.5% despite continued weakness of the US dollar

• Sales growth of New Chemical Entities at 7.4% in local currencies, generics grow by 5.0% in local currencies

• Research ingredients sales decreased by 8.8% in local currencies due to continued economic slump

• Shareholders to participate in favorable development of net income; dividend increase by 10% to CHF 1.10per share proposed to the Annual General Meeting

98.5

111.4

49.9

45.7

49.1

1999

2000

2001

2002

2003

1999

2000

2001

2002

2003

1999

2000

2001

2002

2003

141.4

149.9

144.6

48.3

48.4 37.3

33.5

40.1

47.8

37.6

Bachem - Who We AreBachem is an independent, technology-based company, specialized in the production of innovative biochemicalsfor research purposes and pharmaceutical compounds for the pharma and biotech industries, as well as in thedevelopment of optimal manufacturing processes. Complementary services are geared to support customers fromdedicated syntheses of defined target structures up to the registration of new compounds.

With headquarters in Bubendorf, Switzerland, and affiliates in Europe and the US, Bachem works on a glo-bal scale and holds a leading position in its field. Facilities in Switzerland and in the US, approved by internatio-nal regulatory authorities and suitable also for the large scale production of active ingredients, make Bachem apartner for all major pharmaceutical companies. Based on its dedication to research, Bachem also offers opportu-nities to innovative technology partners for collaborations on future active substances.

The company employs approximately 520 motivated and qualified people worldwide. In its activities, Bachemis committed to its customers, employees and shareholders, as well as to the environment and society as a whole.Bachem’s contribution to the development and production of pharmaceutical compounds benefits these constituen-cies and contributes to secure the long-term future of the company.

Olivier Cheneval, Bachem Bioscience Inc., King of Prussia, PA, USA

Focusing our US business on three centers of competence – research ingredients at Bachem Bioscience, active pharmaceutical ingredients at Bachem California andimmunology products at Peninsula Laboratories – has been completed.

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Preface

Dear shareholdersOnly towards the end of 2003 were there initial signs of the muchanticipated fundamental upswing in world economy, indicating thepossibility of a trend change. Despite the growth dynamics of thehealthcare market, given the continuously aging population in indu-strialized countries and novel offers for unmet medical needs inmany therapeutic areas, also the healthcare industry was affectedand again remained below former double digit growth rates. Ourbusiness, which is oriented to healthcare market, reflected modestmarket developments as well. Sales growth in local markets decreasedto 1.8%. In face of the strong negative currency impact of the wea-kened US dollar by 13.6% as compared to 2002 together withweaker demand for research ingredients, sales in Swiss francs dimi-nished by 3.5%, from CHF 149.9 million to CHF 144.6 million. Thedollar weakness also affected the operating result. Nevertheless, wewere able to increase EBIT by 0.3% from CHF 48.3 million to CHF48.4 million, which resulted in an improvement of EBIT margin from32.2% to 33.5%. Due in large part to a net financial income ofCHF 1.7 million, we were able to increase net profit by 11.4%,from CHF 33.5 million to CHF 37.3 million.

Our performance in 2003The gratifying improvement of EBIT, EBIT margin and net profit,despite the overall economic environment, is a manifestation of ourconsistent efforts to secure and increase the long-term value of ourcompany for our shareholders, our employees, our customers andour partners even during periods of slow growth. During 2003 wehave:

• Taken advantage of business opportunities in the generics businessand achieved sales growth of 5.0% in local currencies. Main con-tributors to this result were peptide generics in the US and non-pepti-dic generics of Sochinaz, member of the Bachem Group, in Europe.

• Increased sales of New Chemical Entities, the active ingredients ofnew, mostly patent-protected products by 7.4% in local currencies.At the same time, we have consolidated the number of new projects,prerequisite for future sales, on a high level.

• Continued to build up marketing and logistics in order to serveour customers more efficiently and competitively and to establishBachem as a business partner of first choice.

• Completed restructuring in the US by focusing responsibilities ofour three sites on specific tasks.

• Started expansion of production capacities that show favorablyhigh levels of utilization in order to meet expected future demands.

• Stocked up important products including high turnover generics toassure supply on demand, a key success factor in the market place.

• Improved management of cash and cash equivalents resulting in asignificant return on securities and bonds.

Contrasting these achievements is the weakness of our research ingre-dients business: the strong reluctance in the industry to invest in researchand generally weak economic conditions resulted in a sales decreaseof 8.8% in local currencies. The negative effect was more pronouncedin the US than in Europe.

There were very favorable developments with Pevion Biotech AG, inwhich Bachem holds a 50% stake. This joint venture with Berna BiotechAG, founded in 2002 and focusing on the development of peptidevaccines, started its first phase I clinical trial with a malaria vaccineat the university hospital of Basel. Results are expected about a yearafter initiation of the trial.

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Increase in dividendWe want all of our shareholders -- including our employees whohold Bachem shares through our employee participation plans -- toparticipate in the favorable development of the Bachem Group. Wetherefore propose to the Annual General Meeting to increase thedividend for the business year 2003 by 10%, from CHF 1.00(including reduction in nominal value by CHF 0.45) to CHF 1.10per share.

Thanks to our employeesWe would like to combine this proposal with our sincere thanks to ouremployees who have made the achievements possible through theircommitment and dedication. Whether in research and development,in production and quality control, in marketing and logistics or inadministration, the qualification and motivation of our employeesform the basis for customer satisfaction and financial success. Forthis reason, employees are the focus of this report. Those colleagueswho are presented serve as representatives for the about 520employees at all our sites and stand for the values for which Bachemis known: quality and efficiency in everything we do.

Outlook 2004Towards the end of last year we saw several indications for a revivalin overall economic conditions, and recent announcements of IPOsin the biotech industry after a long drought can be taken as a sign ofa new vigor. These are also positive indicators for us. We continue tofavorably evaluate the growth opportunities for our active ingredientsbusiness. Recent successes with two long-term contracts signed atthe end of 2003 support this judgment. Nevertheless, prospects forresearch ingredients remain insecure, considering the dependenceon the overall economic development and specifically the dynamicin the biotechnology industry. We continue to reduce our exposureto these influences given the increasing importance of our activeingredients business.

Structurally we have prepared the ground for improving our long-termmarket opportunities. The creation of a holding structure in April2003 allows increased clarity and transparency in the managementof the individual Bachem operating companies. We have investedin marketing and logistics in order to more successfully, rapidly andefficiently provide our quality products to the marketplace. We wantBachem to be known for both best product quality and outstandingservice.

This also holds true vis-à-vis our shareholders. We want to delivermore than good results. With our reporting we also strive to providefull transparency and good corporate governance fully in compliancewith the SWX Swiss Exchange guidelines. Each year we strive toearn your trust and confidence in Bachem. We are confident that wewill be able achieve this objective again for 2004.

Dr. h.c. Peter GroggChairman of the Board

Dr. Rolf NyfelerCEO and Chairman of theCorporate Executive Committee

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Corporate Executive Committee Bachem Holding AGReto Conrad, CFO, Dr. Rolf Nyfeler, CEO,

Dr. Daniel Erne, CTO

Quality at Bachem –identifying and meeting customer needs

is a real challenge and requires particular skillfulness and sensitiveequipment. Today the tests primarily serve to confirm quality, as pro-duction processes are designed in a way that the right result is guar-anteed, provided adherence to all manufacturing instructions. Ac-tive pharmaceutical ingredients are manufactured according tocGMP, the current good manufacturing practice as defined byauthorities, to ensure compliance with highly stringent guidelines forprocesses and the properties of the final product. For each andevery lot, we document in detail which materials have been processedby which methods in which equipment by which employee. It mustbe possible to examine each step of the production process even tenyears after the manufacture of a product.

Quality assurance – programming successThis is where quality assurance becomes important. Production andtest protocols are developed and administered, and information onmaterials, machines, employees, etc. is documented. In addition todefined standards and documentation, training plays an importantrole to assure that employees in all areas are aware of latest knowhow and their respective responsibilities. The objective of this qualitymanagement approach is to avoid mistakes and design systems ina way that any error, should they ever occur, can be detected andcorrected.

Regulatory affairs – take advantage of experience for customers’ benefitOnce a customer intends to test an active ingredient in man or tosubmit an application for marketing authorization, comprehensivedocumentation on the active ingredient and its manufacture must beprovided, in addition to preclinical and clinical data on effectivenessand side effects. As part of our quality management, we offer custo-mers our support for this task. Bachem has already compiled 65national drug master files in Europe as part of registration files andanother 35 in the US. Additionally, several technical documentationshave been deposited for development projects. In this context,Bachem is regularly inspected and tested by regulatory authorities,including the US Food and Drug Administration (FDA). The quality ofour work here is also the basis of trust. Following its latest inspection,for instance, the FDA approved four client products without anotheraudit of our production facilities.

As a worldwide operating specialist for the production of peptidesand selected non-peptidic active pharmaceutical ingredients, wewant to maintain and extend our leadership position. Prerequisitefor doing so is the quality of our products together with our ability torecognize customer needs early on and develop tailor-made solutions.

Quality management – dedicated to highest standardsWhether in research or in the manufacturing of pharmaceuticals,our clients must be able to rely on the quality of our products. Forthat purpose we have built up a quality control management systemthat covers the entire process, from incoming materials for productionand packaging to delivery of the final product. Quality assurance atBachem is fundamental in our overall management and production,and test reports or quality certificates for us are an integral part ofthe final product that is delivered to our customers.

Aligned with the importance we attribute to quality, about 20 percentof Bachem employees work in quality assurance and quality control.The managers responsible for this function are members of the localmanagement teams. Quality is represented also at the corporateexecutive committee level by Daniel Erne. The function is comprisedof quality control, quality assurance and regulatory affairs.

Quality control – testing all incoming and outgoing goodsThe quality control group at our main site in Bubendorf alone conductstens of thousands of tests per year. Each lot of incoming raw materialsor goods and finished products undergoes up to 20 tests in order toassure identity, content and purity. Because highest levels of reliabi-lity are required to assess identity, we always conduct several tests.Once identity has been assured, content – mostly on the basis oftwo tests – and purity – usually several tests – are assessed. Purityassessments comprise tests on residuals of other substances from theproduction process or on the microbial load that can be tested byour in-house microbiology group. Only after identity, content andpurity have been tested are materials released for further processingor sales.

Peptides are often highly active and therefore sometimes producedin small amounts only. Testing very small quantities of active peptides

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Dr. Ulrich Korell and Isabelle Schubnell, Bachem Bubendorf, Switzerland

Ulrich Korell, head of quality assurance and control, is personally responsible vis-à-vis customers and authorities for each lot of active ingredients delivered by Bachem.

Seven points to document for GMP production

1 Who (name, signature)2 When3 What4 How5 Where (location)6 With what (machinery, equipment)7 Why (in case of deviations/decisions)

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Hans Peter Misteli and Madhuri Sharma, Bachem Bubendorf, Switzerland

With the introduction of key account management, Bachem strengthens the relationship with importantcustomers and assures that their needs are recognized early on and appropriate solutions are provided.

Marketing – customer orientation as the basis for successImproved logistics – easing order and supplyReadiness to deliver in many areas of our business is a competitiveadvantage. However, this does not just mean to get goods on theirway to the customer as quickly as possible. It is as important for thecustomer to receive it without delay and any complications. As part ofour new marketing strategy this consideration resulted in a completere-engineering of our logistics chain in Europe. While in the past thecustomer was in charge of import declarations and customs duty,the new system with the handling of all orders via Bachem DistributionServices in Germany relieves recipients of our products from allpaper work. At the same time delivery times were reduced. Fororders coming in by 2:30 p.m. at the latest, 86% of deliveries arriveat our customers next day already. And here as well it was Bachememployees who managed, in collaboration with authorities andlogistics companies, to achieve what many held impossible to achieve.

In the US as a matter of course orders are fulfilled within one workingday. In order to do so, the most important products are held in stock,for important generics, as in Europe, also in larger quantities. Quotesfor simple projects are submitted the same day the request comes in,for more complex projects we strive to provide an answer within 48hours. These examples demonstrate our orientation towards customerneeds and our dedication to be first class not only in terms of productquality.

Bachem – building and supporting our brandAll our marketing efforts are geared to strengthen the reputation ofthe company and trust in our performance for continued success. Inour markets and with our clients we want to be anchored as a brand.And also in terms of marketing communication we want to meet theneeds of our customers. Complementing personal contacts, we provideinformation through our website, by means of regular e-mail updatesand also by providing classical print products on our products, servicesand the company as a whole. These efforts pay off. Increasingly weget inquiries, not only by our customers but also from other marketpartners, inquiries that extend beyond our products and includealso questions on how we are doing business – the best sign that weare on the right track.

In their purchasing decisions, our customers increasingly take addi-tional factors into account, going beyond quality and price. This iswhere marketing serves as an important interface with our custo-mers and plays an integral role in identifying needs and developingcustomer-oriented offers. Bachem has significantly increased its eff-orts in this domain.

Key account management – a big step towards the clientWe have built up a team of experts that systematically is in contact withour key customers in order to learn what they need and, on this basis,offer new ideas and solutions. The job of our key account managers isnot geared at short term sales success, but rather at long-term part-nerships and project collaborations that might lead from initial test syn-theses to non-GMP projects and up to GMP projects for clinical trialsand larger scale production of active ingredients for marketed pro-ducts. Part of this “developmental marketing” is our ability to identifytrends on the basis of our research ingredients activities and thereforeprovide insight on interesting new directions in product developmentthat we can discuss with our partners in universities and our key custo-mers.

The success of key account management is based on the qualifica-tions of the people, their knowledge and expertise as well as theirpersonality. Through ongoing and continuous contact with the custo-mer they build trust, trust in themselves as in Bachem. Accordingly,contacts have to be rather frequent. In some countries we havesignificantly increased the number of customer visits in 2003.Adding to this are visits of our customers at our production sites, animportant prerequisite for a first contract. These contacts are comple-mented by our presence at fairs and exhibitions. Particularly atcustomer fairs in the US we only have a chance to participate if we stayin touch at all levels from the CEO to researchers and the purchasingdepartment.

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for increasing volume sales of the active substances that we produce.If a customer stops a development project owing to unsatisfactoryresults in clinical studies, or because of a change in the strategicfocus of research or as a result of the pipeline being pruned back,e.g. in the wake of a merger, then this results in a corresponding lossof sales potential for us. In this respect, it is very important to havea diversified project portfolio and an adequate number of projectsin different indication areas and with different clients.

With projects in the early phase of development, it is crucial to defineefficient methods of manufacture and provide the small quantitiesrequired on time. On the other hand, in the case of medicines alreadylaunched into the market, we also have to be able to deliver substan-tially higher quantities on time according to the processes that havebeen developed. Thanks to the large capacity available at theGroup company Sochinaz, which can produce substances by theton, Bachem is also able to manufacture large quantities of peptidesand intermediates if required.

In 2003, Bachem increased its sales of NCEs in local currencyterms by a gratifying 7.4%, which roughly matched the growth ofthe pharmaceuticals market. The most important indication areasremain cancer and diabetes. Bachem has amongst other things con-cluded supplier agreements over several years with AstraZeneca forgoserelin (Zoladex for the treatment of prostate and breast cancerand also endometriosis) and with Amylin Pharmaceuticals for pram-lintide (Symlin, types I & II diabetes) and exendin-4 (exenatide, type IIdiabetes). The two diabetes products are still in Phase III clinical trials.Bachem is also active in other interesting areas which are growingin importance, such as viral diseases (HIV, hepatitis) and obesity, aswell as in the field of peptide vaccines through its joint venturePevion Biotech.

New impetus for therapeutically active peptides is to be expectedfrom progress in proteome research. There are very many proteinsstill waiting to be discovered and their function in the human bodyunderstood. Peptide structures derived from these proteins willundoubtedly be studied in the next few years as new lead com-pounds for the treatment of disease, which will open up new marketopportunities.

Business Review

The Bachem Group’s business operations comprise three mainareas, namely the production of New Chemical Entities, generic acti-ve ingredients for the biotech and pharmaceutical industry, and che-micals for research.

New Chemical Entities

New Chemical Entities (NCEs) are patent-protected pharmaceuticalactive ingredients that may only be manufactured and used by thepatent holder or a partner authorized to do so by the patent holder.The majority of diagnostic and therapeutic NCEs manufactured byBachem exclusively for biotech and pharmaceutical companies arestill in the process of clinical trials, while some are already approvedfor sale as medicines on the pharmaceutical market. The quantities ofproducts supplied vary widely and depend both on the medicalindication and also on the status of the project. Demand generallyincreases in step with the progress of clinical development work,reaching its first high spot after a successful launch onto the market,possibly with some time lag, after which it achieves a certain con-stancy.

Projects in the early stage of clinical trials are by their very naturevolatile, because it is not yet possible to predict whether and, if so,when they will reach the market. The likelihood of a successfulapproval procedure increases with every successfully completedphase of clinical development. Regardless of our customer’s stage ofproduct development, Bachem always manufactures the desiredactive substances in accordance with the current rules of goodmanufacturing practice (cGMP) in the required quantity and quality.Since even the supply of very small quantities for trial purposes hasa commercial value, Bachem is not exposed to the risk of drug deve-lopment but, through its collaboration in the development process,performs important preliminary work for consideration as a productionpartner in the event of success.

With about 100 development products, Bachem managed to keepthe number of projects handled in 2003 at a very good level. Thisforms the basis and precondition for our future sales. But not all ourcustomers’ projects lead to marketable medicines with the potential

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Nebih Hyseni, Bachem Bubendorf, Switzerland

Bachem Bubendorf is the largest production center for peptides. Here a lot of new, tried and tested active

pharmaceutical ingredients are manufactured from themilligram to kilogram quantities for some of the world’s

leading pharmaceutical and biotech companies.

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Guillaume Grand-Pierre, Sochinaz Vionnaz, Switzerland

At Sochinaz, active pharmaceutical ingredients and intermediates are produced in largequantities, up to the ton range, in accordance with good manufacturing practice (cGMP).

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to be available for delivery off the shelf at short notice. Readiness fordelivery is therefore a crucial factor, as it is in a similar way with rese-arch ingredients. In the case of substances for which there is amonograph in the European Pharmacopoeia, it is possible to applyfor a Certificate of Suitability (CEP) from the European Directorate forthe Quality of Medicines (EDQM, Strasbourg) for the manufacture ofthe active ingredient. These certificates are recognized by the 31signatory states of the European Pharmacopoeia Convention andby the EU. The CEP serves as proof that the substance complies withthe relevant monograph. Possession of a CEP substantially reducesthe registration costs for the pharmaceutical company and the timeto regulatory approval. In 2003, Bachem was granted one CEPeach for the peptides leuprolide and goserelin.

Sochinaz SA, which belongs to the Bachem Group, producesalmost exclusively non-peptide generic substances. The most impor-tant products are carbidopa and pergolide (both for the treatment ofParkinson’s disease), propofol and midazolam (both anesthetics),trimetazidine (a coronary vasodilator) and xipamide (for the treat-ment of arterial hypertension). Considerable attention is paid atSochinaz to the selection of products. There are thus always a numberof potential new products under evaluation, the aim being to esta-blish one new product on the market every year. As with the pepti-des, competent regulatory handling of the product is essential.Where possible, applications for Certificates of Suitability are alsosubmitted for non-peptide generics. In 2003, Sochinaz was granteda CEP for pergolide mesylate.

In 2003, Sochinaz continued to develop well in a competitive envi-ronment and produced at the limits of its capacity. For this reason,increases in capacity at Sochinaz are planned and will be realizedin the course of 2004.

Generics, too, are subject to the strict principles of good manufac-turing practice (cGMP). Customers and regulatory authorities under-take regular on-site inspections to ensure that the relevant guidelinesare being observed. The three production centers of the BachemGroup which manufacture pharmaceutical active ingredients undercGMP conditions satisfy regulatory requirements in full.

Business Review

Generics

Bachem produces generic active ingredients for the biotech andpharmaceutical industry both on the basis of peptides at its sites inBubendorf, Switzerland, and Torrance, California, USA, and alsoon the basis of small organic molecules in the Group CompanySochinaz SA in Vionnaz, Switzerland. Sales of generics in local cur-rency terms increased by 5.0% over the previous year, especiallydue to increases in peptide generics in the USA and in non-peptidegenerics in Europe. Generics have become an important contributorto Bachem sales, accounting for approximately half of active ingre-dients sales. Of the 20 strongest-selling products of the Group, 11are currently generics. Setbacks during clinical trials of generics aremuch rarer than with NCEs, since the pharmacological principle inthe case of a generic active ingredient is no longer in question andpossible side effects have already been identified.

Many of the older peptide medicines have in the meantime becomegenerics. Since peptides are not easy to administer, and an oraldosage form has yet to become established, new and technologi-cally sophisticated forms such as nasal sprays and long-term depotforms represent a challenge and at the same time an interestingopportunity for innovative companies in the biotech sector. Withwell-known and accepted active ingredients, new patent protectioncan be obtained for a medicine through the development of a newdosage form. Owing to their high degree of specificity and efficacy,the daily dose of peptides is very low and often in the range of a fewmicrograms. In addition, their manufacture, purification and charac-terization are complex processes and require a great deal of know-how. Thanks to these two factors, pressure on the price of genericpeptides remains moderate, and generic peptides are interesting forthe manufacturers of active substances and for the pharmaceuticalindustry. Possible scale effects in manufacture, resulting from a broa-der customer base for a given product, allow reasonable margins tobe achieved.

Bachem manufactures various peptide generics, including leuprolide(prostate and breast cancer), calcitonin (osteoporosis and Paget’sdisease), glucagon (hypoglycemia) and octreotide (acromegaly andtumor therapy). The patent protection for goserelin has also expiredin the meantime. In contrast to NCEs, which are produced exclusivelyand according to the needs of the customer, generics usually have

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Mustaqim Syed, Bachem California, Torrance, USA

Research chemicals are mostly required in small quantities and are produced in laboratories.

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Business Review

positive influence on the demand for peptides. In principle it can besaid that economic influences are felt more strongly and sooner inthe USA than in Europe. This assumption, which is based on a rela-tively short-term approach to business in the USA, is confirmed onthe basis of stable sales in the peptide catalogue business in Europeand Australasia in contrast to a decline in sales in the USA.

With the majority of enzyme substrates and inhibitors, we recordedongoing increases in sales. By contrast, the market for amino acidderivatives in recent years has shown a marked change. The standardbuilding blocks, which are used especially in solid-phase synthesis,are increasingly being manufactured by Asian suppliers. The marketsegment of special amino acids and their derivatives, which we cancover extremely well on the basis of our diversified range, is notaffected by this trend. For this reason, in 2003 we compiled for thefirst time a special catalogue for our range of “building blocks”.

Our high level of readiness for delivery of catalogue products fromstock is essential for a rapid availability of products in the researchbusiness. The new distribution organization in Europe made a furthercontribution to reduce delivery times through a more rapid handlingprocess, in order to better serve our customers.

The catalogue and custom synthesis business also makes an importantcontribution to the business of the Bachem Group beyond the saleof products and services. It is also of major importance for the deve-lopment of efficient manufacturing processes in the context of activeingredient production. The continuous expansion of our synthesisknow-how in relation to new products and more efficient processesnot only allows rapid access to complex structures, but in particularalso satisfies the preconditions for increases in productivity. Activitiesfocused on the research market, originally conceived as an extensionof the catalogue range and as a measure to strengthen customerrelations through focused problem solutions, thus have a substantialinfluence in the longer term on the overall performance of the com-pany. Together with our steady expansion of services, we can con-tinuously develop our fully integrated range and thus maintain ourcompetitive advantage.

Research Ingredients

Our range of research ingredients covers the catalogue businessand custom synthesis. We offer scientists at universities, in hospitalsand in the research labs of the biotech and pharmaceutical industrya wide range of more than 8800 products which our customers useto advantage for biochemical and medical research projects. Lastyear, we added 100 new products to our selection, as well asnumerous products not previously in our product range, but orderedby our customers in the context of contract synthesis.

The sales of research ingredients fell in local currency terms by8.8% in 2003,which was offset by a positive development in thesales of active ingredients , the proportion of sales accounted for byresearch ingredients fell from 23.5% in 2002 to 20.7% in 2003.The pressure to cut costs was acutely felt in the USA, especially inthe field of custom synthesis.

The reasons for this sales decline can be found in the business envi-ronment, where the sluggishness of the economy and investor res-traint led to decreases in research spending and cost-cutting measuresamong customers. In some cases, customers themselves are carryingout small-scale syntheses again, especially when yield and qualityare of secondary importance.

The more challenging projects continue to be contracted out, andprecisely here Bachem continues to show clear competitive advantageswith its extensive experience in the manufacture of extremely complexmolecules.

The principle indication areas for our peptides did not substantiallychange in 2003. Important areas of research focus remain Alz-heimer’s disease and multiple sclerosis, diabetes, osteoporosis andobesity. In these indications, our peptide sales increased in the lastyear. We expect new momentum for the future to come from proteomeresearch or, more broadly, from system biology. Of course, thestrength of this momentum will be influenced by economic factors. Agreater willingness of biotech companies to invest or new initialpublic offerings (IPOs) in this sector will undoubtedly also have a

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Safety and Environment

Our largest production site is located in Bubendorf, Switzerland,and has been committed to the Responsible Care program of theSwiss Association of the Chemical Industry since 1991. For yearsBachem has been documenting key indicators as defined in this pro-gram and using them as a management tool. Environmental perfor-mance indicators have not changed fundamentally as compared tothe previous reporting period. Due to a further reduction of fuel con-sumption, total energy consumption was reduced by 7%. This alsoresulted in a further reduction of CO2 and NOx, both already at alow level. Total SO2 emissions remained constant, as the favorableeffect of reductions in fuel consumption was compensated by a clearincrease in production-related SO2 emissions. Despite an increasein solvents consumptions due to a higher production volume in solidphase synthesis, VOC emissions (emissions of solvents to air) andTOC emissions (residual organic compounds in waste water) remai-ned constant as compared to the previous year. Relating overallresource consumption and emissions to the number of employees,most indicators are far below the average of the Swiss chemicalindustry. Only the above average value for VOC emissions hasremained unchanged, and measures to reduce VOC emissions havebeen launched.

We are aware that our employees contribute essentially to the suc-cess of Bachem. As part of our systematic efforts in the field of occu-pational health, we therefore place high importance on providingas healthy and safe a working environment as possible. In additionto technical measures, this also includes prevention campaigns andemployee training in order to heighten staff awareness of all safetyissues. In 2003, accident frequency slightly increased, from 3.6 to3.9 per 100 staff members, as compared to the previous year,when the rate had shown a significant reduction. There was also aslight increase in accident-related lost working days, from 0.20 to0.27 per employee per year, although no serious accidents werereported in 2003. In comparison to the industry average, accidentrate and severity are still at a low level.

Human Resources

The number of Bachem Group employees increased by 16 in 2003,to a total of 495 full-time equivalent jobs as a result of demand foradditional employees in Switzerland. At the main site in Bubendorf,Switzerland, expansion in production as well as in research anddevelopment resulted in the creation of ten new full-time jobs: eightnew jobs were created at Sochinaz SA in Vionnaz, Switzerland, pri-marily in production in order to meet order demand. In the US, thenumber of employees went down slightly by three full-time equiva-lent jobs net as a result of different trends for our three sites. Whilestaff numbers were reduced at both Peninsula Laboratories andBachem Bioscience by nine and two respectively, we created eightnew jobs at Torrance in order to establish the centers of competen-ce in the US, as announced last year. With the reduction of staff atPeninsula Laboratories the restructuring in the US was completed inthe course of 2003.

The manufacture of highly complex molecules is a demanding taskfor all of our employees. Accordingly, employees of the BachemGroup are highly educated, with about 25 percent of our peopleholding university degrees.

In order to secure continuous high levels of performance, leadershiptraining is of particular importance. In 2003, Bachem has takenparticular efforts in this respect. At our Bubendorf site, 60 employ-ees attended management courses and another 22 did so in Vion-naz. Topics addressed were, among others, success factors inmanagement functions, vision and strategy of the company andcommunication behavior in team situations. These training and furt-her education measures support organizational development signi-ficantly. They also contribute to improve cross-functional contactswithin the organization, helping to further develop internal commu-nication and interaction between different departments. Given thepositive results, we intend to run further training sessions during2004 and 2005.

At our headquarters site in Bubendorf, Bachem also engages in edu-cational programs for apprentices. Currently, Bachem is training 17apprentices for future work as lab assistants, and, as part of this eff-ort, we run our own training lab. In addition, we train commercialapprentices: one in informatics and, as of 2004, one new appren-tice as logistics assistant.

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1515

Romina Di Marco, Bachem Bubendorf, Switzerland

The human resource function takes care of all employee-relatedmatters, with responsibility for recruiting the right people andoverseeing their continuous training and further education. In2003, ten new full-time positions were created in Bubendorf.

Number of full-time equivalent jobs

The number of full- and part-time employees totaled 522 at the end of 2003. Mostemployees work in our labs and production units, a reflection of Bachem’s strongtechnological emphasis..

USA

Vionnaz

Bubendorf

Other Europe

Total 495

122

89

268

16

14.3%Sales andMarketing

15.9%,Finance, HumanResources and IT

18.0%Quality Assurance

and Quality Control

8.0% Engineering andMaintenance

43.8%Production,incl. Researchand Development

Employees by activities

16

Corporate Governance

1. Group structure and shareholdersBachem Holding AG

1.1 Group structureOn January 1, 2004

1 Marketing organization for North and South America

All participations are held at 100%. Further participations withoutmajority share are listed on page 44.

During 2003, the Group structure was changed by the creationof a holding company. For this purpose the existing Bachem AG hasbeen transferred into Bachem Holding AG. At the same time, theoperating units of the company have been separated and, as a non-cash contribution, brought into the newly founded Bachem AG, a100% affiliate of Bachem Holding AG. The new structure has seve-ral advantages, such as: improved ability to measure and compareoperating performance of different Bachem companies; adjustedlegal and management structure; and, consequently, increasedtransparency and – on a long-term – tax optimization.

Bachem Holding AG, headquartered in Bubendorf, Switzerland, islisted at the SWX Swiss Exchange in Zurich (valor number: 1 253 020,ISIN: CH0012530207). Market capitalization at December 31,2003 was CHF 862 920 000. No other Bachem companies arelisted.

1.2 Significant shareholdersShareholders with more than five percent of voting rights (December31, 2003) are listed on page 44. There are no shareholders’ agree-ments.

1.3 Cross shareholdingsThere are no cross shareholdings with other companies.

16

Board of DirectorsDr. h.c. Peter Grogg, ChairmanGottlieb Knoch, Vice ChairmanDr. Thomas Burckhardt, SecretaryDr. François L’EplattenierProf. Dr. Hans Hengartner

Bachem AGDr. T. Früh, COO

Bachem Distribution Services GmbHDr. W. Fritzen, Manager

Labortec AGDr. B. Streb, COO

Bachem Trading AG

Bachem Americas1

Dr. J. de Chastonay, President

Bachem California Inc.P. Ottiger, President & COO

Bachem Bioscience Inc.Dr. M. Pennington, President & COO

Peninsula Laboratories Inc.R. Rieder, COO

Sochinaz SADr. J. Cotting, COO

Bachem (UK) Ltd.Dr. S. Moore, COO

Peninsula Europe Ltd.(inactive)

Bachem Biochimie SARL(inactive)

Corporate Executive CommitteeDr. Rolf Nyfeler, CEOReto Conrad, CFODr. Daniel Erne, CTO

17

2. Capital structure

2.1 CapitalAt December 31, 2003, the nominal share capital of Bachem Hol-ding AG was CHF 680 000.

2.2 Authorized and conditional share capital in particularBachem does not have any conditional and authorized capital out-standing.

2.3 Changes in capitalIn 2003, nominal share capital was reduced by means of a nominalvalue reduction (from CHF 0.50 to CHF 0.05 per share) fromCHF 6 800 000 to CHF 680 000. In 2002, nominal share capitalhad remained unchanged. In 2001, shares were split in a ratio of1:20 (reduction of nominal value per share from CHF 10 toCHF 0.50 and increase of number of shares from 680 000 to13.6 million). This transaction remained without impact on nominalshare capital. Changes for other items listed under equity for theyears 2003, 2002 and 2001 are listed on page 27.

2.4 Shares and participation certificatesAt December 31, 2003, Bachem Holding AG had issued 6 802 000 registered shares A and 6 798 000 registered shares Bat a nominal value of CHF 0.05, all fully paid in. Registered shares B,but not registered shares A, are considered for trade at the stockexchange. Otherwise both types of shares have the same rights, andthere are particularly no differences regarding rights to dividends

and voting rights. Each registered share carries one vote at theAnnual General Meeting of the company, provided the shareholderhas been recorded in the company’s share register (see item 2.6).All shares are fully entitled to dividends. There are no participationcertificates.

2.5 Profit sharing certificatesBachem has not issued any profit sharing certificates

2.6 Limitations of transferability and nominee registrationsRegistered shares of Bachem can be transferred without restriction.Registration in the share register of Bachem requires the proof ofpurchase of shares on own account and own benefit. There are nofurther registration restrictions (e.g. percentage limitation). The regi-stration of nominees without voting rights is permitted, nominee regi-strations including voting rights have to be approved on request bythe Board of Directors on a case by case basis. During the reportingperiod no nominees with voting rights have been registered norhave been any other exceptions to entering the share register beengranted by the Board.

2.7 Convertible bonds and warrants/optionsThe company has not issued any convertible bonds. The only optionsthe company has issued are for its employee compensation plan asdescribed in note 23 to the consolidated financial statements on page 39.

17

18

Corporate Governance

3.2 Other activities and vested interestsOther activities are listed in above table.

3.3 Cross involvementsThere are no cross involvements among the members of the Boardof Directors and Boards of other listed companies.

3.4 Elections and terms of officeMembers of the Board are elected by the shareholders’ meeting for aperiod of three years. Re-election is permitted. Elections are conductedas total renewal. For information concerning first election andremaining term of office, see item 3.1.

3.5 Internal organizational structureDuring 2003, the Board of Directors held five half-day and one full-day meeting. Meetings are prepared by the Chairman and by com-mittees of various compositions. Decisions are taken by the fullBoard. The Board can decide when more than half of its membersare present. It decides by majority of votes. In case of a tie, the voteof the Chairman decides.

3. Board of Directors

3.1 Members of the Board of DirectorsThe Board of Directors is comprised of non-executive members only.The only member of the Board of Directors who held an executive posi-tion in the Bachem Group during the past three years was Peter Grogg.

In matters of employee participation plans, the Board is supported bythe Compensation Committee (see item 3.1), which defines the indi-vidual allotment of options. In 2003, the Compensation Committeemet once.

It has been purposely decided that no further company BoardCommittees, e.g. an Audit Committee, are elected in view of the size ofthe Board of Directors with its five members. The respective tasks aredealt with by the full Board as part of its regular meetings.

3.6 Definition of areas of responsibilityThe Board of Directors exercises its responsibilities as set out by lawor in the Articles of Incorporation. These include the ultimate directingof the company, determining the Group’s guidelines, strategic planningof corporate and business policies for the Bachem Group, as well assetting necessary directives for corporate management. The Boardalso defines compensation for members of the Corporate ExecutiveCommittee and for COOs of operating group companies. Further,the Board is in charge of the consolidated financial statements of theBachem Group, as well as the financial statements of Bachem Hol-

since elected until

Peter Grogg (1942)1, Dr. h.c., Chairman, Swiss 1971 2006Until April 30, 2002 CEO of the Bachem GroupMain seats held on other boards: Berna Biotech AG, GABA Holding AGManagement board member of the Swiss Association for Chemical Industry and of the Basel Chamber of Commerce

Gottlieb Knoch (1942), MBA, Vice-Chairman, Swiss 1985 2006Graduate Chemist ETHMain seats held on other boards: Rothschild Bank AG

Thomas Burckhardt (1950), Dr. iur., LL.M., Secretary, Swiss 1997 2006Lawyer

François L'Eplattenier (1939)1, Dr. sc. techn. ETH, Member, Swiss 1997 2006President Novartis Venture FundMain seats held on other boards: Centre Suisse d'Electronique et de Microtechnique,Cytos Biotechnology AG, Gene Data AG, Novimmune SA, Schweizerhall Holding AG, Member of the Scientific AdvisoryBoards of Lombard Odier Darier Hentsch & Cie. and of Aravis Venture Associates AG

Hans Hengartner (1944)1, Prof. Dr. sc. nat. ETH, Member, Swiss 2003 2006Head of the Department of Biology at ETH Zurich

1 Members of the Compensation Committee

19

4. Corporate Executive Committee

4.1 Members of the Corporate Executive Committee since

Rolf Nyfeler (1950), Dr. phil. II, CEO, Swiss 2000Rolf Nyfeler joined Bachem in 1982. He was responsible for Research and Development for some time and became COO of the Parent Company in 1998,after a commitment as Head of Production in the subsidiary in California. Since May 1, 2002, he is CEO of the Bachem Group and Chairman of theCorporate Executive Committee. He completed his education as a chemist at the Universities of Basel and San Diego and at the Max Planck Institute in Martinsried.

Reto Conrad (1966), lic. oec. HSG, CFO, Swiss 2001Reto Conrad joined Bachem in 2001 as Chief Financial Officer and Member of the Corporate Executive Committee. He is responsible for all finance activities of the Bachem Group. He is a Swiss Certified Public Accountant and has a Master degree in Business Administration from the University of St. Gallen (HSG).Prior to joining Bachem, he worked nine years in various functions of the business assurance sector at PricewaterhouseCoopers in Basel and San Francisco,after first working two years as a Controller at UBS in Basel.

Daniel Erne (1952), Dr. sc. nat. ETH, CTO, Swiss 1997Daniel Erne joined Bachem AG in 1987 as Head Quality Control. Since 1997 he is a Member of the Corporate Executive Committee of the Bachem Group responsible for Quality Assurance and Regulatory Affairs. He received his education as a chemist at the Swiss Federal Institute of Technology in Zurich (ETHZ),then became a research fellow at the University of Utah, Salt Lake City, and at ETHZ before joining Bachem AG.

ding AG, including reports of the external auditors. It also assesseswhether recommendations of the auditors have been implemented.The detailed tasks of the Board of Directors are described in theorganization regulations.

3.7 Information and control instruments vis-à-vis the Corpo-rate Executive CommitteeThe Corporate Executive Committee regularly attends meetings ofthe Board in order to assure the ongoing and appropriate flow ofinformation. Further, the Board is informed periodically about themost important key figures. The Chairman regularly meets membersof the Corporate Executive Committee for discussions of businessdevelopment, status of projects and important events.

4.2 Other activities and vested interestsNo member of the Corporate Executive Committee exercises anyother activity or has any vested interests.

4.3 Management contractsBachem has not entered into any management contracts.

5. Compensation, shareholdings and loans

5.1 Content and method of the compensation and the share-holding programsCompensation and shareholding programs are defined by theBoard of Directors. Members of the Board of Directors receive a base

compensation, meeting fees and free shares. The members of theCorporate Executive Committee receive, in addition to their basesalary, free shares and options. The additional variable part ofcompensation is subject to business success as well as meeting per-sonal objectives.

5.2 Compensation for members of the Board of Directorsand the Corporate Executive CommitteeTotal compensation for the five non-executive members of the Boardamounted to CHF 301 050 in 2003. Compensation for the threemembers of the Corporate Executive Committee for the businessyear totaled CHF 853 400. No severance payments were made.

20

Corporate Governance

5.7 Additional fees and remunerationOne Board member received fees of CHF 18 140 as a compensationfor legal services.

5.8 Loans to members of governing bodiesThere were no loans granted to members of the Board of Directorsor of the Corporate Executive Committee.

5.9 Highest total compensationThe highest total compensation paid to a member of the Board ofDirectors during the year under review was CHF 176 250 (inclu-ding 300 shares).

6. Shareholders’ participation

6.1 Voting rights and representation restrictionsAll shareholders recorded in the share register (see item 2.6) areentitled to attend and vote at the Annual General Meetings. Repre-sentatives have to be shareholders and to be authorized in writingunless they are the shareholder’s legal representative. For organi-zational reasons, subsequent to closing the share register (see item6.5) no further registrations can be executed. Shareholders sellingtheir shares prior to the Annual General Meeting are no longer entitledto vote. Exceptions may be authorized by the Board of Directors.

Number of Number of Year of Exercise Vesting dates shares options allocation price of options Expiry dates

Board of Directors (5 members) 8 770 353 0

Corporate Executive Committee (3 members) 92 490 800 2001 80.00 30.09.04 30.09.05800 2001 80.00 30.09.05 30.09.06800 2001 80.00 30.09.06 30.09.07400 2002 80.00 20.10.05 20.10.06400 2002 80.00 20.10.06 20.10.07

1200 2002 80.00 20.10.07 20.10.081200 2003 60.30 30.11.08 30.11.09

Total 8 862 843 5 600

One option entitles to purchase one Bachem Holding AG share at the respective exercise price upon vesting.

5.3 Compensation for former members of the Board of Direc-tors and the Corporate Executive CommitteeNo payments were made to any former members of the Board ofDirectors or of the Corporate Executive Committee.

5.4 Share and option allotment in the year under reviewThe five members of the Board of Directors in 2003 were allotted atotal of 1 500 shares. The three members of the Corporate ExecutiveCommittee during the reporting year received a total of 300 sharesand 1 200 options.

5.5 Share ownershipFor the number of shares held by the members of the Board and ofthe Corporate Executive Committee at December 31, 2003, seetable below.

5.6 OptionsFor the number of options held by the members of the CorporateExecutive Committee at December 31, 2003, see table below.Members of the Board did not hold any options.

21

6.2 Statutory quorumsThe Annual General Meeting passes resolutions and makes elections,if not otherwise required by law (Swiss Code of Obligations, article704), with a simple majority of the votes represented. For the cal-culation of the simple majority, abstentions and empty votes are notconsidered.

6.3 Convocation of the general meetings of shareholdersAn ordinary Annual General Meeting is held within six months afterthe end of the company’s business year. Extraordinary general mee-tings may be convened by the Board of Directors, by the statutoryauditors or by one or more individual shareholders representing aminimum of ten percent of share capital.

The convocation of the Annual General Meeting is due at least20 days prior to the meeting by publication in the Swiss CommercialGazette and a minimum of one daily newspaper with nationalcirculation. The meeting can also be convened by letter to all regi-stered shareholders.

6.4 AgendaShareholders may demand that an item be included in the agenda.Such a demand must be made in writing and shall specify the pro-posals. Shareholders holding in total at least ten percent of theshare capital may request an extraordinary general meeting.

6.5 Inscriptions into the share registerThe share register is usually closed ten days before the AnnualGeneral Meeting. The Board of Directors approves on requestexceptions for late permission. The effective date of closure is publis-hed in time in the financial calendar on the company’s website atwww.bachem.com.

7. Changes of control and defense measures

7.1 Duty to make an offerThe Articles of Incorporation of Bachem Holding AG do not envisagea duty to submit a public purchase offer according to art. 32, para-graph 1 of the federal law governing stock markets and stock dealing(BEHG) (Opting Out).

7.2 Clauses on changes of controlNeither any member of the Board of Directors nor any member ofthe Corporate Executive Committee have a contractual agreementin case of change of control.

8. Auditors

8.1 Duration of the mandate and term of office of the leadauditorPricewaterhouseCoopers AG, Basel, are Group auditors since1995 and statutory auditors of Bachem Holding AG (formerlyBachem AG) since 1998. Hanspeter Plozza is lead auditor since thebusiness year 1997. Auditors are elected by the Annual GeneralMeeting on an annual basis.

8.2 Auditing feesAuditing fees of PricewaterhouseCoopers for the Bachem Groupamounted to CHF 145 000 for the business year 2003. Fees foraudit services on other Bachem companies by other auditors totaledCHF 60 000.

8.3 Additional feesDuring 2003, PricewaterhouseCoopers charged additional fees ofCHF 292 000 for various projects.

8.4 Supervisory and control instruments vis-à-vis the auditorsThe Board of Directors is responsible for the evaluation of the externalaudits. For this purpose, the external auditors prepare a report forthe attention of the Board of Directors. The external auditors meetwith the Board of Directors at least once a year. During this meetingthe management letters concerning the individual companies andthe consolidated financial statements that are summarized in theaudit report, are discussed. Further the external auditors provide anoverview on all audits and reviews conducted as well as on currenttrends in the International Financial Reporting Standards (IFRS).

9. Information policyThe Bachem Group has an open and up-to-date information policythat treats all target groups of the capital investment market equally.The most important information tools are the annual report and thehalf-yearly report, the web site (www.bachem.com), press releases,presentation of the financial statements for media and analysts aswell as the Annual General Meeting. Shareholders are in additioninformed on important matters by letter. As a company quoted onthe SWX Swiss Exchange, Bachem is obliged to publish informationthat is relevant to its share price (ad hoc publicity, art. 72 of rulesgoverning quoted companies "Kotierungsreglement"). These rules canbe viewed under www.swx.com. For specific questions regardingBachem, contact our investor relations responsible, Reto Conrad,CFO, phone +41 61 935 2333, reto.conrad@bachem.com.

Financial Report

22

Financial ReportDespite continued difficult market conditions, the Bachem Groupincreased sales in 2003 by 1.8% in local currencies. In view of thestrong depreciation of the US dollar, sales in Swiss francs decrea-sed by 3.5%. The average US dollar exchange rate relevant for theconsolidation of local results fell by 13.6%, as compared to the pre-vious year. The increase of the Euro by 3.6% could only compensa-te for the dollar weakness to a minor extent.

Change Changein local in Sales

in CHF million 2003 currencies CHF share

Active pharmaceutical ingredients 114.7 +5.1% 0.0% 79.3%

Research ingredients 29.9 -8.8% -15.0% 20.7%

Total 144.6 +1.8% -3.5% 100.0%

Sales developments of the individual business segments are com-mented in the business review section of this report.

Geographically, sales developed as follows:

Change Changein local in Sales

in CHF million 2003 currencies CHF share

Europe 93.2 +2.2% +2.3% 64.5%

USA 51.4 +1.3% -12.5% 35.5%

Total 144.6 +1.8% -3.5% 100.0%

In the business year 2003, growth in local markets was distributedfairly equally across the geographic segments. However, we wereconfronted with opposing trends within the geographic segments. InEurope, non-peptidic generics and NCEs particularly contributed togrowth, while peptide generics showed strong growth in the US.Sales of research ingredients decreased in both markets, however,the US business was particularly affected where the custom synthe-sis business suffered from significant price pressure.

Operating resultBecause of the exchange rate development described above, theoperating result before depreciation and amortization (EBITDA)slightly decreased by 1.2% in Swiss francs, from CHF 61.6 millionin 2002 to CHF 60.9 million in the reporting period. In local cur-rencies, however, EBITDA increased by 2.7%, which is over pro-portionally as compared to sales. This resulted in an increase ofEBITDA margin by one percentage point to 42.1%. In the reportingyear, increase of inventories has doubled as compared to 2002.This is a result of stocking up several generics for which there is con-tinued high demand, as well as increased inventories in the US forproducts manufactured in Europe. These planned inventory increa-ses are considered necessary in order to meet imminent deliveryrequirements that are characteristic for the generics and catalogueproduct businesses. Material cost increased slightly during thereporting period by a currency adjusted 3.4% reflecting the in-creased production to meet higher stock targets. Personnel cost, themost important cost factor in the income statement, was at CHF48.5 million for 2003, up 3.1% currency adjusted as compared to2002, and reflects both general salary increases as well as an addi-tional 16 full-time equivalent jobs in the Bachem Group. Generaloperating cost also increased during the reporting period by a cur-rency adjusted 14.9%. This results primarily from a gain reportedunder this item in 2002 of CHF 0.5 million from the sale of a buil-ding in San Diego, California, USA, without any correspondingincome in 2003. Further contributing to this result were a once offextraordinary cost for the foundation of Bachem Holding AG, thecompletion of the restructuring of Peninsula Laboratories Inc. andthe settlement of a lawsuit in the US, totaling to CHF 1.4 million.Depreciations decreased by 4.4%, currency adjusted, as a result ofdelays of new investments at a time when former investment projectshad been completely written off. For all of these reasons, EBIT grewby 4.7% currency adjusted, resulting in a satisfying increase of EBITmargin from 32.2% to 33.5%.

23

Financial resultsThanks to the favorable development of the stock markets, as com-pared to the previous reporting period, realized income from secu-rities almost doubled to CHF 0.7 million. Considering the strict riskmanagement regarding foreign currency exposure, translationeffects that had resulted in a loss of CHF 5.3 million for 2002 werereduced to CHF 0.8 million, even despite the strong depreciation ofthe US dollar as described above. Overall this resulted in a netfinancial result of plus CHF 1.7 million in 2003, as compared to netloss of CHF 2.9 million in 2002.

Tax rateTax rate was reduced from 25.1% to 23.1% during the reportingperiod, as a result of slowed growth as compared to the previousyear and lower income before tax in the US. On the other side, anumber of additional individual measures led to the reduction of thetax rate, including the formation of Bachem Holding AG.

InvestmentsDuring the reporting period, investments significantly fell onceagain, to CHF 10.1 million as compared to CHF 12.2 million in2002, resulting from delays of individual capacity expansion pro-jects because of late authority approvals. Investments are dividedas follows:

in CHF million 2003 2002

Land 0.1 1.2

Buildings 2.9 2.6

Assets under construction 1.7 0

Installations 1.4 2.8

Laboratory equipment 2.2 3.5

Other 0.7 1.0

Investments in tangible fixed assets 9.0 11.1

Intangible assets (without goodwill) 1.1 1.1

Total investments 10.1 12.2

Important investment projects included the reconstruction of aBubendorf production unit that was scaled up to meet the latestrequirements for even more stringent production processes accor-ding to cGMP. We commenced expansion of a production buildingat Sochinaz, which will include the installation of a high pressurereactor to significantly increase production capacities at Sochinazand eliminate the current bottleneck. The new production unit isscheduled to be operational by the end of 2004. At Bachem UK,construction of a new building began in autumn 2003 as the finalphase of establishing this unit as competence center for custom syn-thesis by mid 2004.

Consolidated Income Statementsfor the years ended December 31

24

2003 2002Notes 000 CHF 000 CHF

Sales 3/4 144 637 149 888

Other income 240 1 069

Cost of materials -24 878 -26 433

Changes in inventories 8 409 3 971

Staff cost -48 498 -49 235

Depreciation and amortization expense 3/5/6 -12 432 -13 309

Other operating expenses -19 057 -17 694

Operating income 3 48 421 48 257

Result from associated companies 3/7 -1 546 -715

Financial income, net 3/8 1 666 -2 857

Income before taxes 48 541 44 685

Income taxes 3/9 -11 236 -11 195

Net income 3 37 305 33 490

Earnings per share (CHF) 10 2.82 2.51

Diluted earnings per share (CHF) 10 2.81 2.51

Consolidated Balance Sheetsat December 31, 2003 and 2002

25

December 31, 2003 December 31, 2002Assets Notes 000 CHF 000 CHF

Cash and cash equivalents 83 717 86 385

Marketable securities 11 45 156 36 251

Trade and other receivables 12 34 614 28 773

Inventories 13 56 136 48 957

Total current assets 219 623 200 366

Tangible fixed assets 5 109 729 110 588

Intangible assets 6 18 550 22 663

Associated companies 7 739 2 285

Prepaid pension fund contributions 14 537 702

Deferred tax assets 19 1 370 3 098

Other financial assets 15 5 442 4 292

Total long-term assets 136 367 143 628

Total assets 3 355 990 343 994

Liabilities and equity

Trade payables 7 020 7 697

Short-term financial debts 16 0 2 164

Other short-term liabilities 17 5 690 5 264

Provisions 18 1 396 1 117

Total short-term liabilities 14 106 16 242

Deferred tax liabilities 19 17 467 16 443

Defined benefit plan liabilities 14 324 543

Total long-term liabilities 17 791 16 986

Total liabilities 3 31 897 33 228

Share capital 680 6 800

Retained earnings 265 797 235 548

Share premium 85 839 85 839

Own shares -12 588 -4 821

Fair value reserves -1 667 -4 620

Cumulative translation differences -13 968 -7 980

Total equity 324 093 310 766

Total liabilities and equity 355 990 343 994

Consolidated Cash Flow Statementsfor the years ended December 31

26

2003 2002Notes 000 CHF 000 CHF

Cash flow from operating activities

Net income 37 305 33 490

Reversal of non-cash items:Income taxes 9 11 236 11 195

Depreciation and amortization expense 3/5/6 12 432 13 309

Financial income, net 3/8 -1 666 2 857

Loss/Gain on sale of tangible fixed assets 6 -513

Result from associated companies 3/7 1 546 715

Income taxes paid -11 707 -15 924

Change in net current assets -13 469 -4 700

Other operating cash flow items -177 -2 785

Cash flow from operating activities 35 506 37 644

Cash flow provided by/(used for) investing activities

Investment in tangible fixed assets 5 -9 039 -11 099

Investment in intangible assets 6 -1 043 -1 710

Proceeds from sales of tangible fixed assets 39 3 517

Investment in financial assets 7/15 -1 125 -3 000

Change in marketable securities -4 975 9 509

Interest and other financial receipts 2 101 2 885

Cash flow provided by/(used for) investing activities -14 042 102

Cash flow provided by/(used for) financing activities

Change in own shares -7 571 -1 892

Change in financial debts -2 164 -1 572

Interest and other financial payments -486 -827

Nominal value reduction -6 120 0

Dividends paid -7 252 -10 031

Cash flow provided by/(used for) financing activities -23 593 -14 322

Net effect of currency translation on cash and cash equivalents -539 -1 766

Net change in cash and cash equivalents -2 668 21 658

Cash and cash equivalents at the beginning of the year 86 385 64 727

Cash and cash equivalents at the end of the year 83 717 86 385

Net change in cash and cash equivalents -2 668 21 658

Consolidated Statements of Shareholders’ Equityfor the years ended December 31

27

Fair Deferred taxes CumulativeShare Retained Share Own value on fair translation Total

capital earnings premium shares reserves value reserves differences 2003000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF

Balance January 1, 2003 6 800 235 548 85 839 -4 821 -5 959 1 339 -7 980 310 766

Net income 0 37 305 0 0 0 0 0 37 305

Dividends paid 0 -7 252 0 0 0 0 0 -7 252

Transactions with own shares 0 196 0 -7 767 0 0 0 -7 571

Nominal value reduction -6 120 0 0 0 0 0 0 -6 120

Cumulative translation differences 0 0 0 0 0 0 -5 988 -5 988

Change of fair value reserves 0 0 0 0 4 132 -1 179 0 2 953

Balance December 31, 2003 680 265 797 85 839 -12 588 -1 827 160 -13 968 324 093

Fair Deferred taxes CumulativeShare Retained Share Own value on fair translation Total

capital earnings premium shares reserves value reserves differences 2002000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF

Balance January 1, 2002 6 800 211 047 85 839 -1 887 -613 149 2 814 304 149

Net income 0 33 490 0 0 0 0 0 33 490

Dividends paid 0 -10 031 0 0 0 0 0 -10 031

Transactions with own shares 0 1 042 0 -2 934 0 0 0 -1 892

Cumulative translation differences 0 0 0 0 0 0 -10 794 -10 794

Change of fair value reserves 0 0 0 0 -5 346 1 190 0 -4 156

Balance December 31, 2002 6 800 235 548 85 839 -4 821 -5 959 1 339 -7 980 310 766

Fair Deferred taxes CumulativeShare Retained Share Own value on fair translation Total

capital earnings premium shares reserves value reserves differences 2001000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF

Balance January 1, 2001 6 800 183 448 85 839 -319 0 0 2 143 277 911

Effect of introduction of IAS 39 0 0 0 0 6 440 -1 420 0 5 020

Net income 0 37 619 0 0 0 0 0 37 619

Dividends paid 0 -10 020 0 0 0 0 0 -10 020

Transactions with own shares 0 0 0 -1 568 0 0 0 -1 568

Cumulative translation differences 0 0 0 0 0 0 671 671

Change of fair value reserves 0 0 0 0 -7 053 1 569 0 -5 484

Balance December 31, 2001 6 800 211 047 85 839 -1 887 -613 149 2 814 304 149

For transactions with own shares, see page 44, Notes to the Financial Statements of Bachem Holding AG. The shares of Bachem HoldingAG were split 1:20 as of June 29, 2001. In addition the share capital was reduced in 2003 to CHF 680 000. The new nominal value pershare is CHF 0.05. The share capital is divided into 6 802 000 shares Bachem A (50.01% of share capital) and 6 798 000 shares B(49.99% of share capital). The shares Bachem B are traded at the Swiss Exchange (SWX) under valor number 1 253 020. All shares areregistered shares. Except for the registration of Bachem B shares, there are no further differences between the two share categories. Theshares A are wholly owned by Ingro Finanz AG (see Notes to the Financial Statements of Bachem Holding AG).

Notes to the Consolidated Financial Statements

28

1. Accounting Policies for the Bachem GroupBusiness activityBachem is an independent, technology-based company speci-alizing in the development of manufacturing processes for theproduction of innovative biochemical and pharmaceuticalcompounds. With its headquarter in Bubendorf (Switzerland)and affiliates in Europe and the US, the Group works on a glo-bal scale and holds a leading position in its field.

Principles of consolidationThe financial statements of the Bachem Group are prepared inaccordance with the International Financial Reporting Stan-dards (IFRS) formulated by the International Accounting Stan-dards Board (IASB) and its predecessor organizations. Theconsolidated financial statements have been approved by theBoard of Directors of Bachem Holding AG on March 30,2004.

Scope of consolidationThe financial statements include all companies which BachemHolding AG directly or indirectly controls (over 50% of votinginterest). The companies included in the consolidation arelisted in this annual report. The financial statements of the com-panies included in the consolidation are prepared using uni-form accounting policies. Intercompany income and expenses,including unrealized gross profits from internal Group transac-tions and intercompany receivables and payables, have beeneliminated. The annual closing date of the individual financialstatements is December, 31.

Exchange rate differencesThe consolidated financial statements of the Group are expres-sed in Swiss Francs. In the local accounts, transactions inforeign currencies are translated at the exchange rate prevai-ling on the transaction date and the resulting foreign exchan-ge transaction gains and losses are recognized in the localincome statement. Assets and liabilities of the consolidatedgroup companies are translated using the year end exchangerates that prevailed at the balance sheet date while income,expenses and cash flows are translated into Swiss Francsusing the respective yearly average exchange rate. Translationdifferences arising from movements in the exchange rates usedto translate the financial statements of the consolidated groupcompanies are allocated to equity.

Recognition of incomeSales are recognized on delivery or on providing services andare reported net of sales taxes and rebates.

Regional segment informationThe primary segmentation is based on the geographical infor-mation by the location of the assets and is separated in the twosegments Europe/Rest of World and North/South America.

Business segment informationThe secondary segmentation is based on the two business seg-ments active pharmaceutical ingredients and research ingre-dients (incl. custom synthesis). Investments and assets cannotbe separated into the business areas since we are using multi-purpose-equipment which can be used to produce all of ourproducts.

Cash and cash equivalentsThis includes petty cash, bank balances and short-term depo-sits with original maturities of three months or less.

Marketable securitiesMarketable securities are classified as either "held-for-trading"(mainly derivatives) or "available-for-sale" (mainly marketablesecurities). All investments are initially recorded at cost, inclu-ding transaction cost. All purchases are recognized on the sett-lement date. Held-for-trading investments are subsequently car-ried at fair value, with all changes in fair value recorded asfinancial income (expense) in the period in which they arise.Available-for-sale investments are subsequently caried at fairvalue, with all changes in fair value recorded in equity. Whenthe availble-for-sale investments are sold, impaired or otherwi-se disposed of, the cumulative gains and losses previouslyrecognized in equity are included in financial income (expen-se) for the current period.

Trade receivables Accounts receivable are carried at the original invoice amountless allowance made for doubtful accounts. An allowance isrecorded for the difference between the carrying amount andthe recoverable amount where there is objective evidence thatthe Group will not be able to collect all amounts due.

Other receivablesThis position includes other receivables from third parties, loansto employees, other loans with a maturity of less than 12months, prepaid expenses for goods and services not yet recei-ved as well as income from the current year that will not bereceived until the following year.

29

InventoriesInventories include raw materials, spare parts, work-in-pro-gress and finished goods. They are stated at the lower ofacquisition or manufacturing cost and net realizable marketvalue. Manufacturing cost includes all related production cost.Provisions are made for inventories which are slow moving.

Tangible fixed assets and depreciationTangible fixed assets (property, plant and equipment) arereported at cost of acquisition or production cost and depreci-ated on a straight-line basis to the income statement (exclusiveland), over the following estimated useful lives:

Buildings 20 to 50 yearsInstallations 10 to 20 yearsLaboratory equipment 10 to 20 yearsComputer hardware 3 to 5 yearsVehicles 5 to 7 years

The useful lives reflect the economic useful life of the respectiveassets. Maintenance expense is recognized in the income state-ment. Expenses that extend the estimated useful life of tangiblefixed assets are capitalized. Financing expenses for assets underconstruction are not capitalized.

Intangible assetsIntangible assets such as patents and licences are chargeddirectly to the income statement. In the case of business com-binations, the excess of the purchase price over the fair valueof net identifiable assets acquired is recorded as goodwill inthe balance sheet. Goodwill is amortized to income on astraight-line basis over its useful live. The amortization periodis determined at the time of the acquisition, based upon theparticular circumstances, and ranges from 5 to 20 years. Soft-ware is amortized on a straight-line basis over its expecteduseful life, usually between 3 and 5 years.

Associated companies/joint venturesAssociated companies and joint ventures are accounted for bythe equity method.

Financial assetsFinancial assets are valued at fair market values as marketablesecurities. Financial assets which are not traded regularly at astock exchange are valued at acquisition cost, less any valua-tion reserves. If parts of those financial assets that are not regu-larly traded at stock exchanges are sold to independent thirdparties, the sales price is used as a reference price for the valu-ation of the remaining financial assets.

Impairment of long-term assetsLong-term assets are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying amountof the asset may not be recoverable. When such events orchanges in circumstances indicate the asset may not be reco-verable, the Group estimates the future cash flows expected toresult from use of the asset and its eventual disposition. If thesum of such expected discounted future cash flows is less thanthe carrying amount of the asset, an impairment loss is recog-nized for the amount by which the asset's net book valueexceeds its fair market value.

Short-term liabilitiesShort-term liabilities include all liabilities that are due within12 months.

Long-term liabilitiesLong-term liabilities include all known liabilities as per yearend, which can reliably be quantified with a due date of atleast one year after the date of the balance sheet. All financingcosts are included in the income statement of the relevant period.

Research and developmentLaboratory buildings and inventories for research and deve-lopment are capitalized and depreciated according to therespective accounting policies. Since the criteria for a capitali-zation are not met, the other expenses for research and deve-lopment are fully charged to the income statement.

Notes to the Consolidated Financial Statements

30

TaxesTaxes on income are accrued in the same periods as the reve-nues and expenses to which they relate. Deferred taxes havebeen calculated using the comprehensive liability method.They are calculated on the temporary differences that arisebetween the tax base of an asset or liability and its carryingvalue in the balance sheet of the Group companies preparedfor consolidation purposes, except for those differences rela-ted to investments in subsidiaries where their reversal will nottake place in the foreseeable future. Furthermore, withholdingor other taxes on eventual distribution of retained earnings ofGroup companies are only taken into account where a divi-dend has been planned since generally the retained earningsare reinvested. Deferred tax benefits are only fully capitalizedwhen it is probable that a benefit will be realized in the fore-seeable future.

Defined benefit pension plansThe defined benefit obligation of the material defined benefitpension plans are calculated regularly, at least every twoyears by an independent actuary using the projected unit cre-dit method. The defined benefit obligation is equal to the pre-sent value of all estimated future cash flows. Plan assets arevalued at fair market values. Actuarial gains and losses arecharged or credited to income over the service lives of the rela-ted employees if they exceed a corridor of +/- 10%. Theexpenses for such pension plans, representing the net periodicpension cost less employee contributions, are included in thestaff costs in the income statement.

ProvisionsProvisions are recognized where a legal or constructive obli-gation has been incurred which will be probably lead to anoutflow of resources that can be reasonably estimated. Provi-sions are recorded for the estimated ultimate liability that isexpected to arise, taking into account foreign currency effectsand the time value of money. A contingent liability is recordedwhere the existence of the obligation will only be confirmedby future events, or where the amount of the obligation cannotbe measured with reasonably reliability.

Employee share participations plansThe shares and options granted within the employee sharesparticipations plans are recorded in equity and not in staffcost for the consolidated financial statements.

Own sharesOwn shares are valued at acquisition cost and are deductedfrom equity.

Financial risk managementFinancial risk management is governed by Corporate Executi-ve Committee. It monitors foreign exchange risks, interest raterisks, market risks, credit risks and liquidity risks on an ongo-ing basis and approves the use of financial instruments toreduce certain risks. The Corporate Executive Committeebelieves that, in order to create the optimum value for theGroup, it is not desirable to eliminate or mitigate all possiblemarket fluctuations.

31

The primary segment information is based by the location of assets.Segment information based by the location of customers would notresult in material changes.

Europe/ North/ ConsolidatedRest of World South America Eliminations values

3. Segment information 2003 2002 2003 2002 2003 2002 2003 2002(regions) 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF

Sales third parties 93 234 91 142 51 403 58 746

Sales intercompany 29 296 26 541 3 942 3 866 33 238 30 407

Total sales 122 530 117 683 55 345 62 612 33 238 30 407 144 637 149 888

Operating income 40 066 37 664 12 955 15 403 4 600 4 810 48 421 48 257

Result from associated companies -1 546 -715 0 0 0 0 -1 546 -715

Financial income, net 5 302 -814 -1 480 -715 2 156 1 328 1 666 -2 857

Income taxes -7 013 -5 204 -4 182 -5 165 41 826 -11 236 -11 195

Net income 36 809 30 931 7 293 9 523 6 797 6 964 37 305 33 490

Other information

Assets 514 815 363 885 70 633 70 635 229 458 90 526 355 990 343 994

Liabilities 33 166 27 982 14 117 14 957 15 386 9 711 31 897 33 228

Investments 8 802 8 565 1 280 4 244 10 082 12 809

Depreciations and amortizations 10 615 10 752 1 817 2 557 12 432 13 309

Income statement Balance sheetaverage year end

rates 2003 2002 rates 2003 2002 2. Exchange rates CHF CHF CHF CHF

1 US Dollar 1.3451 1.5575 1.2423 1.3875

1 English Pound 2.1973 2.3342 2.2087 2.2254

1 Euro 1.5206 1.4673 1.5593 1.4542

Notes to the Consolidated Financial Statements

32

At December 31, 2003, buildings of Peninsula Laboratories Inc.were held under operating leases. The future minimum lease pay-ments under uncancellable operating leases are:

No later than a year: CHF 45 000 Total rents recognized in theincome statement 2003: CHF 465 000

Assets under Installa- Laboratory Total TotalLand Buildings construction tions equipment Other 2003 2002

5. Tangible fixed assets 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF 000 CHF

Cost at January 1 11 287 84 108 33 46 049 51 765 9 717 202 959 208 002

Additions 127 2 932 1 667 1 438 2 157 718 9 039 11 099

Disposals 0 -1 0 -5 682 -6 894 -958 -13 535 -4 068

Transfers 0 0 -32 0 0 32 0 0

Translation effects -628 -1 939 -13 -495 -1 619 -296 -4 990 -12 074

Cost at December 31 10 786 85 100 1 655 41 310 45 409 9 213 193 473 202 959

Accumulated depreciation at January 1 0 15 810 0 35 704 32 916 7 941 92 371 90 437

Depreciation 0 2 328 0 2 099 2 265 589 7 281 8 384

Cumulative depreciationon disposals 0 0 0 -5 672 -6 860 -958 -13 490 -1 064

Translation effects 0 -514 0 -351 -1 325 -228 -2 418 -6 560

Other 0 0 0 0 0 0 0 1 174

Accumulated depreciation at December 31 0 17 624 0 31 780 26 996 7 344 83 744 92 371

Net book value at December 31 10 786 67 476 1 655 9 530 18 413 1 869 109 729 110 588

2003 2002 2003 20024. Segment information (business segments) in % in % 000 CHF 000 CHF

Active pharmaceutical ingredients 79.3% 76.5% 114 704 114 652

Research chemicals (incl. custom synthesis) 20.7% 23.5% 29 933 35 236

Total sales 100.0% 100.0% 144 637 149 888

33

Other-intangible Total Total

Goodwill assets 2003 20026. Intangible assets 000 CHF 000 CHF 000 CHF 000 CHF

Cost at January 1 41 886 4 799 46 685 45 067

Additions 0 1 043 1 043 1 7101

Translation effects 0 -43 -43 -92

Cost at December 31 41 886 5 799 47 685 46 685

Accumulated depreciation at January 1 21 641 2 381 24 022 19 181

Depreciation 4 196 955 5 151 4 925

Translation effects 0 -38 -38 -84

Accumulated depreciation at December 31 25 837 3 298 29 135 24 022

Net book value at December 31 16 049 2 501 18 550 22 663

which are based on the virosome technology patented by Berna.Pevion Biotech AG is accounted for by using the equity

method. Valuation as of December 31, 2003: CHF 0.7 million(Investments up to now of CHF 3 million less proportional loss ofCHF 2.3 million).

Financial statements of Pevion Biotech AG

7. Investment in associated companiesOn January 7, 2002, Bachem Holding AG and Berna Biotech AGfounded Pevion Biotech AG in Bern, each with a 50% stake. Thenew company - based on the know-how of the two founding com-panies - will develop innovative therapeutic and prophylactic vac-cines against Malaria, Hepatitis C, Melanoma und Alzheimer,

1 In accordance with IAS 22 note 71, goodwill on the acquisition of Sochinaz has been increased from initially CHF 9 990 000 by CHF 591 000 to CHF 10 581 000 during theprior year. This adjustment is calculated in accordance with Bachem's accounting standards and is related to a shortage in provision for Sochinaz pension plans of this amount atJanuary 1, 2001. The increase in goodwill will be written off over the remaining nine years, i.e. at CHF 66 000 annually up to 2010.

2003 2002 December 31, 2003 December 31, 2002Income statements 000 CHF 000 CHF Balance sheets 000 CHF 000 CHF

Sales 197 100 Current assets 1 609 4 771

Staff cost -1 228 -718 Long-term assets 450 366

Administration cost -468 -503 Assets 2 059 5 137

Research and development cost -1 564 -338

Depreciation expense -43 -17 Short-term liabilities 552 529

Operating income -3 106 -1 476 Long-term liabilities 29 38

Financial income 14 46 Equity 1 478 4 570

Net loss -3 092 -1 430 Liabilitites and equity 2 059 5 137

Notes to the Consolidated Financial Statements

34

2003 20028. Financial income, net 000 CHF 000 CHF

Financial income

Interest income 1 050 1 600

Dividend income 1 114 1 276

Gains of disposal of securities 1 148 2 019

Other 80 8

Total 3 392 4 903

Financial expense

Interest expense -67 -182

Loss on disposal of securities -432 -1 645

Other -417 -609

Total -916 -2 436

Currency result, net -810 -5 324

Financial income, net 1 666 -2 857

The following elements are the explanation for the difference bet-ween the expected Group tax rate (the weighted average rate is

based on the earnings before taxes of each affiliated company)and the effective rate:

No deferred tax assets have been capitalized for tax loss carry-forwards, as the future realization is not assured.

2003 20029. Income taxes 000 CHF 000 CHF

Current taxes 9 399 10 520

Deferred taxes 1 837 675

Total income taxes 11 236 11 195

Tax rate analysis 2003 2002 % %

Expected tax rate 26.1 24.8

Effect of income taxed at reduced rates -2.2 -2.0

Effect of disallowed expenditures 0.6 0.8

Effect of utilization of tax losses brought forward from prior periods -0.6 0.0

Prior year and other items -0.8 1.5

Effective tax rate 23.1 25.1

35

This position comprises marketable securities which are traded in liquid markets.

As of December 31, 2003, 20 200 options were outstanding. Asof December 31, 2002, 16 900 options were outstanding, which

did not have a material dilution effect.

2003 200211. Marketable securities 000 CHF 000 CHF

Shares Market/book value 25 790 15 691

Derivatives Market/book value 1 6

Contract value 1 312 1 026

Bonds Market/book value 19 365 20 554

Market/book value 45 156 36 251

2003 200213. Inventories 000 CHF 000 CHF

Raw materials 8 895 9 852

Finished products 47 241 39 105

Total 56 136 48 957

2003 2002Not capitalized tax loss carry-forwards by expiry date: 000 CHF 000 CHF

up to five years 47 44

more than five years 3 848 4 298

Total 3 895 4 342

10. Earnings per share (EPS) 2003 2002

Net income (000 CHF) 37 305 33 490

Weighted average number of ordinary shares issued (basic) 13 249 707 13 324 757

Basic earnings per share (CHF) 2.82 2.51

Diluted earnings per share (CHF) 2.81 2.51

2003 200212. Trade and other receivables 000 CHF 000 CHF

Trade receivables 28 012 24 472

Provisions for doubtful trade receivables -1 123 -1 146

Prepaid expenses and accrued income 3 009 2 868

Tax receivables 2 373 1 212

Other receivables 2 343 1 367

Total 34 614 28 773

Notes to the Consolidated Financial Statements

36

14. Pension fundsEmployee benefits and pension plans are based on the regulationsand situations of each country where Bachem is represented. Incountries with defined contribution plans, the related costs in 2003were CHF 847 166 and CHF 1 392 094 in 2002.

In Switzerland Bachem AG and Sochinaz SA are members of so-called "BVG Sammelstiftungen". These funds are considered definedbenefit plans for the purpose of the consolidated financial state-ments. The following is a summary status of these defined benefitplans at December 31, 2003 and 2002:

2003 2002Proof of the net asset in the balance sheet: 000 CHF 000 CHF

Fair value of plan assets 26 622 25 009

Defined benefit obligations -30 388 -28 492

Funded status -3 766 -3 483

Unrecognized actuarial loss 3 979 3 642

Net asset in balance sheet 213 159

The unrecognized actuarial loss of CHF 3 766 067 is outside of thecorridor of 10% of the plan assets therefore as of 2003 amortizationis required.

1 As calculated in accordance with Bachem's accounting standards to reflect a shortage in provision for Sochinaz pension plans of this amount at January 1, 2001. See also Note 6.

2003 2002Annual cost for pension funds: 000 CHF 000 CHF

Service cost 2 499 2 332

Cost of interest 1 068 1 034

Expected return on assets -1 000 -946

Employee contributions -1 123 -1 032

Recognized actuarial loss 127 0

Annual cost for pension funds 1 571 1 388

2003 2002Development of the net asset in the balance sheet: 000 CHF 000 CHF

Net asset in the balance sheet at January 1 159 619

Addition from the acquisition of Sochinaz1 0 -591

Annual cost for pension funds -1 571 -1 388

Employer contributions 1 625 1 484

Other changes 0 35

Net asset in the balance sheet at December 31 213 159

37

Polyphor is a start-up company with substantial potential for thefuture. Polyphor is specialized on the synthesis of focused librariesof single compounds of high purity and is involved in research inthe field of protein-protein interaction. For 2003, the company has

been treated in line with accounting standards for financial assetsas participation will fall under 20% in the near future.

In 2003 share capital was increased from CHF 3 015 000 toCHF 3 415 000. Bachem Holding AG subscribed 1 125 registeredshares with a nominal value of CHF 100 per share.

The actual return on assets for 2003 was CHF 1 148 669. In theprevious year the actual loss on assets was CHF 1 076 000.

2003 2002Composition of the net asset in the balance sheet: 000 CHF 000 CHF

Prepaid pension fund contributions 537 702

Defined benefit plan liabilities -324 -543

Net asset in the balance sheet 213 159

2003 200215. Other financial assets 000 CHF 000 CHF

Polyphor AG 5 375 4 250

Other 67 42

Total 5 442 4 292

2003 2002

Polyphor AG, Allschwil (Switzerland) Share capital nom. [CHF] 3 415 000 3 015 000

Holding rate 28.33% 28.36%

Voting rights 28.33% 28.36%

2003 200216. Short-term financial debts 000 CHF 000 CHF

Current maturity of long-term debt 0 2 164

Total 0 2 164

The following assumptions are underlying the actuarial calculations: 2003 2002

Discounting interest rate 3.75% 3.75%

Return on assets 4.00% 4.00%

Expected future increase in salaries 1.50% 1.50%

Notes to the Consolidated Financial Statements

38

Provisions for restructuring are formed for planned restructuring pro-jects. These provisions include only expenses, coming out of therestructuring projects and no expenses which are connected to the

daily activities of the Group. The new provisions are mainly in con-nection with the restructuring of Peninsula Laboratories Inc.

Provisions fo- Provisions Total Totalrestructuring for warranties 2003 2002

18. Provisions 000 CHF 000 CHF 000 CHF 000 CHF

At January 1 468 649 1 117 2 307

New provisions 498 6 504 310

Dissolved provisions 0 -28 -28 -18

Provisions used during the year -142 -5 -147 -1 323

Translation effects -51 1 -50 -159

At December 31 773 623 1 396 1 117

Current part: 773 623 1 396 1 117

2003 200219. Deferred taxes 000 CHF 000 CHF

Assets associated with - inventories 543 553

- tangible fixed assets 0 672

- provisions 249 139

- other accruals 578 1 734

Total 1 370 3 098

Liabilities associated with - inventories 6 825 6 623

- tangible fixed and intangible assets 8 392 7 965

- provisions 1 681 1 530

- other accruals 569 325

Total 17 467 16 443

2003 200217. Other short-term liabilities 000 CHF 000 CHF

Deferred income and accrued expenses 4 758 1 499

Other short-term liabilities 932 3 765

Total 5 690 5 264

39

20. Contingent liabilityThere were no material contingent liabilities as per December31, 2003 as well as per December 31, 2002.

21. CommitmentsAll commitments, including buy- and sell-commitments ofgoods, are not above their market value and are according tothe normal business terms.

22. Consolidated companies Participation1 Participation1

Company Country 2003 2002

Bachem Holding AG, Bubendorf (formerly Bachem AG) Switzerland Parent company Parent company

Bachem AG, Bubendorf2 Switzerland 100%

Bachem Trading AG, Bubendorf Switzerland 100% 100%

Labortec AG, Bubendorf Switzerland 100% 100%

Sochinaz SA, Vionnaz Switzerland 100% 100%

Bachem Biochimie SARL, Mulhouse (inactive) France 100% 100%

Bachem Distribution Services GmbH, Weil am Rhein Germany 100% 100%

Bachem (UK) Ltd., St. Helens England 100% 100%

Peninsula Laboratories Europe Ltd., St. Helens (inactive) England 100% 100%

Peninsula Laboratories Inc., San Carlos USA 100% 100%

Bachem Bioscience Inc., King of Prussia USA 100% 100%

Bachem California Inc., Torrance USA 100% 100%

1 direct or indirect2 During 2003, the group’s structure was changed by the creation of a holding company. For this purpose the existing Bachem AG has been transferred into Bachem Holding AG.

At the same time, the operating units of the company have been separated and, as a non-cash contribution, brought into the newly founded Bachem AG, a 100% affiliate ofBachem Holding AG.

23. Employee share participation plansThe following employee stock grant plans exist:

a) Employee participation scheme 1All employees of the Bachem Group subsidiaries are periodicallygranted gratis shares after three whole years of service. The quan-tity depends on the status and ranges from 20 to 200. The sharesare disposable.

b) Employee participation scheme 2Certain managers receive at the time of their promotion gratis sha-res. These shares are blocked for five years.

c) Share option planCertain managers of the Bachem Group receive options gratis. Theoptions granted entitle recipients to acquire one Bachem share withunlimited voting and dividend rights.

Notes to the Consolidated Financial Statements

40

The options expire one year after they become exercisable.Share capital under the option plans amounts to CHF 1 010.

The Group holds own shares in order to meet its obligations underthe employee share participation plans. These own shares arededucted from equity. The book value is based on either cost, forthose shares which have been purchased, or on the nominal value forthose shares that have been reserved for these purposes at the lastcapital increase. For the change in stock of Bachem shares, pleaserefer to Note 3 to the Financial Statements of Bachem Holding AG.

24. Transactions with related partiesSales generated in 2003 with associated companies were CHF329 900 (prior year: CHF 25 000). As of December 31, 2003receivables from associated companies amounted to CHF 13 500(December 31, 2002: CHF 0). Further please refer to the sectionCorporate Governance on pages 16 to 21.

25. Subsequent eventsOn February 29, 2004 the share capital of Pevion Biotech AG wasincreased from CHF 2 million to CHF 4 million. Bachem HoldingAG subscribed CHF 1 million registered shares with a nominalvalue of CHF 1 and an agio of CHF 2 per registered share.

As scheduled, on March 26, 2004 the third increase in sharecapital of Polyphor AG did take place. Bachem Holding AG sub-scribed 1 125 shares for a counter-value of CHF 1 125 000. Theparticipation rate fell from 28.33% to 28.31%.

2003 2002Share options outstanding Number Number

At January 1 16 900 10 000

Granted options 3 700 6 900

Cancelled options -400 0

Exercised options 0 0

At December 31 20 200 16 900

Exercisable options 0 0

Vesting dates of outstanding options are as follows: Exercise price

Year 2004 80.00 2 900 3 000

Year 2005 80.00 4 200 4 300

Year 2006 80.00 5 200 5 300

Year 2007 80.00 4 200 4 300

Year 2008 60.30 3 700 0

Total 20 200 16 900

Report of the Group Auditors

41

Report of the Group auditors to the Annual General Meeting of Bachem Holding AG, Bubendorf

As auditors of the Group, we have audited the consolidated financial statements (balance sheet, income statement, cash flow statement, sta-tement of shareholder’s equity and notes/pages 24 to 40) of Bachem Holding AG for the year ended December 31, 2003.

These consolidated financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion onthese consolidated financial statements based on our audit. We confirm that we meet the legal requirements concerning professional quali-fication and independence.

Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession and with the International Stan-dards on Auditing, which require that an audit be planned and performed to obtain reasonable assurance about whether the consolidatedfinancial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosu-res in the consolidated financial statements. We have also assessed the accounting principles used, significant estimates made and the ove-rall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements give a true and fair view of the financial position, the results of operations and thecash flows in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.

We recommend that the consolidated financial statements submitted to you be approved.

Basel, March 30, 2004 PricewaterhouseCoopers AG

H. Plozza P. Seiler

Financial Statements of Bachem Holding AG

42

2003 2002Income statements 2003 and 2002 000 CHF 000 CHF

Sales 0 69 097

Sales deduction 0 -438

Income from licenses 8 708 0

Other operating income 0 2 228

Total 8 708 70 887

Cost of materials 0 -5 780

Staff cost -1 875 -23 632

Depreciation and amortization expense -7 008 -10 978

Cleaning and maintenance -49 -225

Administration, sales and marketing cost -3 272 -2 906

Other operating expenses 0 -3 506

Operating income before interest and taxes -3 496 23 860

Financial income 9 324 12 366

Financial expense -688 -7 369

Currency gain 3 417 7 447

Currency loss -3 842 -13 479

Income before taxes 4 715 22 825

Taxes -519 -4 281

Net income 4 196 18 544

Income statement and balance sheet for the reporting period arenot fully comparable to the previous year. In 2003 the formerly exi-sting Bachem AG has been renamed into Bachem Holding AG. Atthe same time, the operating units of the company have been sepa-rated and, as a non-cash contribution, brought into the newly foun-ded Bachem AG, a 100% affiliate of Bachem Holding AG.

Financial Statements of Bachem Holding AG

43

December 31, 2003 December 31, 2002Balance sheets at December 31, 2003 and 2002 000 CHF 000 CHF

Assets

Cash and cash equivalents 50 514 73 108

Marketable securities 48 469 32 333

Trade receivables, third parties 0 5 285

Trade receivables, intercompany 0 3 380

Other receivables, third parties 212 3 989

Other receivables, intercompany 1 914 399

Prepaid expenses and accrued income 160 1 028

Inventories 0 4 209

Current assets 101 269 123 731

Investments 123 089 52 479

Tangible fixed assetsReal estate 0 34 767

Machinery and installations 13 5 153

Intangible assets 2 067 29 629

Long-term assets 125 169 122 028

Total assets 226 438 245 759

Liabilities and equity

Trade payables, third parties 0 2 079

Trade payables, intercompany 0 406

Other short-term liabilities, third parties 925 1 730

Other short-term liabilities, intercompany 1 131 0

Deferred income and accrued expenses 810 1 196

Provisions 0 7 600

Liabilities 2 866 13 011

Share capital 680 6 800

Legal reservesGeneral reserves 89 897 89 897

Reserves for own shares 12 588 4 821

Free reserves 111 082 106 849

Retained earnings 2003 2002

000 CHF 000 CHF

Retained earnings at January 1 5 129 5 837

Net income 4 196 18 544 9 325 24 381

Equity 223 572 232 748

Total liabilities and equity 226 438 245 759

Income statement and balance sheet for the reporting period are notfully comparable to the previous year. The formerly existing BachemAG has been renamed into Bachem Holding AG. At the same time,

the operating units of the company have been separated and, as anon-cash contribution, brought into the newly founded Bachem AG,a 100% affiliate of Bachem Holding AG.

Financial Statements of Bachem Holding AGNotes

44

With the exception of Pevion Biotech AG (held at 50%) and Poly-phor AG (held as financial asset) all companies are controlled with

100% of the voting rights either directly or indirectly.

3. Own sharesOn December 31, 2003 Bachem Holding AG held 411 299 ownshares, 200 782 are reserved for trading and 210 517 are reserved

for distribution under the employee share participation plans.

Percent of total Percent of totalshare capital share capital

4. Important shareholders December 31, 2003 December 31, 2002

Based on the available information the following shareholders own more than 5% of the registered share capital:P. Grogg (via Ingro Finanz AG)1 50.5 50.5

G. Knoch 8.6 8.6

Family of P. Grogg 6.0 6.01 In this position all shares A are included

1. Investments Share capital Share capitalCompany Location Branch December 31, 2003 December 31, 2002

Bachem AG Bubendorf, CH Production, Sales CHF 25 000 000 0

Bachem Trading AG Bubendorf, CH Sales CHF 100 000 100 000

Labortec AG Bubendorf, CH Production CHF 100 000 100 000

Sochinaz SA Vionnaz, CH Production, Sales CHF 700 000 700 000

Bachem Biochimie SARL (inactive) Mulhouse, F Sales EUR 75 000 76 225

Bachem Distribution Services GmbH Weil am Rhein, D Sales EUR 128 000 128 000

Bachem (UK) Ltd. St. Helens, GB Production, Sales GBP 2 500 2 500

Peninsula Europe Ltd. (inactive) St. Helens, GB Production, Sales GBP 36 000 36 000

Peninsula Laboratories Inc. San Carlos CA, USA Production, Sales USD 32 000 32 000

Bachem Bioscience Inc. King of Prussia PA, USA Production, Sales USD 3 000 000 3 000 000

Bachem California Inc. Torrance CA, USA Production, Sales USD 3 000 3 000

Pevion Biotech AG Bern, CH Production, Sales CHF 2 000 000 2 000 000

Polyphor AG Allschwil, CH Production, Sales CHF 3 415 000 3 015 000

2003 20022. Insurance value of tangible fixed assets 000 CHF 000 CHF

Machinery and equipment 0 60 000

Real estate 0 49 844

Stock StockDecember 31, 2003 Sales Purchases January 1, 2003

Transactions of own shares: [pieces] [pieces] [pieces] [pieces]

Employee participation scheme at the price of CHF 1.22 110 517 18 200 1 000 127 717

Option plan at the price of CHF 0.05 100 000 0 0 100 000

Treasury Stock at the price of CHF 62.00 200 782 31 000 170 212 61 570

Appropriation of Earnings

45

Proposal of the Board of Directors for the appropriation of earnings

The Board of Directors of Bachem Holding AG proposes to appropriate the available earnings as follows: CHF

Net income 4 196 081

Retained earnings at January 1 5 128 691

Retained earnings 9 324 772

Withdrawal from free reserves 111 081 653

Available for the Annual General Meeting 120 406 425

Payment of a dividend of CHF 1.10 per registered share for the business year 2003 on 13 201 231 registered shares entitled to a dividend 14 521 354

Transfer to free reserves 100 000 000

Retained earnings to be carried forward 5 885 071

The total amount of dividend mentioned in the proposal of theBoard has been calculated on the basis of numbers of shares eligibleto a dividend on the day of the Board meeting. The number of sha-res eligible to a dividend can still change up to the Annual General

Meeting on May 12, 2004, depending on the distribution of sharesto employees or purchase/sale of own shares. For this reason, divi-dends paid last year varied from the amount declared in the AnnualReport 2003 and actually totaled CHF 7 251 967.

Report of the Statutory Auditors

46

Report of the statutory auditors to the Annual General Meeting of Bachem Holding AG, Bubendorf

As statutory auditors, we have audited the accounting records and the financial statements (balance sheet, income statement andnotes/pages 42 to 45) of Bachem Holding AG for the year ended December 31, 2003.

These financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these financialstatements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence.

Our audit was conducted in accordance with auditing standards promulgated by the Swiss profession, which require that an audit be plan-ned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. We have exa-mined on a test basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting prin-ciples used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basisfor our opinion.

In our opinion, the accounting records and financial statements and the proposed appropriation of available earnings comply withSwiss law and the company's articles of incorporation.

We recommend that the financial statements submitted to you be approved.

Basel, March 30, 2004 PricewaterhouseCoopers AG

H. Plozza P. Seiler

47

Share information 2003 2002 2001 2000 1999 19982

Registered shares, nominal value CHF 0.05 13 600 000 13 600 000 13 600 000 13 600 000 13 600 000 13 600 000

Average number of outstanding shares 13 249 707 13 324 757 13 347 000 13 345 340 13 311 520 12 706 520

Dividend per share CHF 1.10 1.001 0.75 0.75 0.65 0.50

Share price nominal share high CHF 75.00 105 145 200 130 114

low CHF 50.10 59 58 119 98 68

year end CHF 63.45 65 95 140 128 100

Dividend yield high 2.0% 1.7%1 1.3% 0.6% 0.7% 0.7%

low 1.3% 1.0%1 0.5% 0.4% 0.5% 0.4%

Group income per share CHF 2.82 2.51 2.82 3.59 3.01 2.55

Net cash flow from operating activities per share CHF 2.68 2.83 2.35 2.38 3.37 2.93

Group equity per share CHF 24.46 23.32 22.79 20.82 17.89 15.57

Price / earning ratio (year end) 22.5 25.90 33.69 39.00 42.52 39.22

Market capitalization at year end CHF m 863 884 1 292 1 904 1 741 1 360

Bachem registered shares are traded at the Swiss Exchange (SWX).Valor number: 1 253 020 SWX: BANB Reuters: BAMZnThe shares of the Bachem Holding AG were split 1:20 as of June 29, 2001.In 2003, share capital was reduced from CHF 6 800 000 to CHF 680 000 by means of nominal value reduction.

Financial Calendar 2004/2005

Annual General Meeting (business year 2003) May 12, 2004

Payout date for dividend May 18, 2004

Half year results 2004 August 2004

Full year sales 2004 January 2005

Full year results 2004 April 2005

Annual General Meeting (business year 2004) May 11, 2005

1 including nominal value reduction of CHF 0.45 per share2 Trading of Bachem shares started on June 18, 1998. Issue price: CHF 56.75. Opening price: CHF 67.55.

Shareholder Information

Contacts

SwitzerlandBachem Holding AGBachem AGBachem Trading AGLabortec AG

Hauptstrasse 144CH-4416 BubendorfTel.: +41 61 935 2333Fax: +41 61 935 2325Email: sales.ch@bachem.com

Sochinaz SAroute du Simplon 22CH-1895 VionnazTel.: +41 24 482 4444Fax: +41 24 482 4445Email: info@sochinaz.ch

GermanyBachem DistributionServices GmbHHegenheimer Strasse 579576 Weil am RheinGermanyTel.: +41 61 935 2323Fax: +41 61 935 2325Email: sales.ch@bachem.com

USABachem AmericasBachem California Inc.

3132 Kashiwa StreetTorrance, CA 90505 – USATel.: +1 310 539 4171

1 888 422 2436 (USA only)Fax: +1 310 530 1571Email: sales@us.bachem.com

Bachem Bioscience Inc.3700 Horizon DriveKing of Prussia, PA 19406 – USATel.: +1 610 239 0300

1 800 634 3183 (USA only)Fax: +1 610 239 0800Email: sales@us.bachem.com

Peninsula Laboratories Inc.305 Old County RoadSan Carlos, CA 94070 – USATel.: +1 650 592 5392Fax: +1 650 595 4069Email: info@penlabs.com

Great BritainBachem (UK) Ltd.P.O. Box 6217K Westside Industrial EstateJackson Street, St. HelensMerseyside WA9 3AJ EnglandTel.: +44 1744 61 2108Fax: +44 1744 73 0064Email: sales.uk@bachem.com

Investor RelationsBachem Holding AGReto ConradTel.: +41 61 935 2333Fax: +41 61 935 2324Email: reto.conrad@bachem.com

Internetwww.bachem.com

This Annual Report is published in German and English

Published by: Bachem Holding AG,Bubendorf, SwitzerlandDesign, project management and production:Com.factory AG, Basel, SwitzerlandPrint: Birkhäuser+GBC AG, Reinach BL,SwitzerlandPhotography: Geri Krischker, Zürich, Switzerland

Front cover: Nadia Delfauro, Sochinaz Vionnaz, Switzerland

48

Mustapha Sesay and Derick del RosarioBachem California, Torrance, USA

We are Bachem. Peptides are our business.